The seven habits of successful retail investors
SINGAPORE - A recent report from Allianz Global Investors on “The seven habits of successful investors” addresses concerns and problems commonly faced by retail investors. Here is an excerpt to guide you on your investment journey.
Know yourself and challenge your intentions
Lessons learned in behavioural finance repeatedly boil down to the one realisation: We still tend to demonstrate prehistoric behavioural patterns that cannot always be rationally explained.
For example, we often view the investment world in a frame, that is, we see what we want to see and may be excluding better alternatives as a result.
We tend to follow the crowd or be driven by sentiments that push investors, particularly back and forth between fear and greed.
Aversion to losses is just as typical. We suffer more pain when we make a loss than we enjoy the same amount of gain.
This can be dangerous if you leave all you have in a savings account as a result and thus forgo returns that you urgently need, or if you back off from realising losses and start again.
“They’re only losses on paper. I’ll wait until share prices are back to where they were when I started and then sell,” is a deceptive mindset.
Base your investment decisions on “purchasing power |preservation” not “security”
“Security” is often seen as synonymous with the absence of price fluctuations.
In seeking security, however, retail investors overlook the risk of losing purchasing power – which is even more unpleasant, considering that interest on savings is virtually zero.
If you want to preserve your capital, the minimum requirement for an investment should be “purchasing power preservation”.
The biggest risk may be not taking any risk.
The fundamental law of |capital investment: go |for risk premiums
Successful investors know that they cannot earn risk premiums without taking risks.
Investments in riskier assets should be justified with the expectation that those investments will generate higher returns over time than other investments with no risk exposure that thus offer less opportunity.
For instance, long historical time series available for the US equity market show that taking greater risks on equities has clearly been rewarded over the long term.
From a purchasing power perspective, equities have offered greater security than bonds.
Invest, don’t speculate
Speculating is betting on price movements in the short term. Investing is putting your capital to work over the medium or longer term.
The risk of missing the best days on the capital markets is extremely high.
Make a binding commitment
Investors have three options for making a binding commitment:
lStrategic/long-term aspects should govern allocation to the various asset classes. Decide on a strategic allocation between equities and bonds that suits your risk profile and use it to steer through turbulence in the capital markets.
lThe general rule to follow is never to put all your eggs in one basket, so diversify. Invest money broadly, combining equities with bonds – and maybe other segments as well. The “multi-asset” approach makes it possible.
lInvest regularly.
Don’t put off till tomorrow what you can do today
Billions of dollars are slumbering in savings and bank deposit accounts despite the fact that one of the key drivers of investment success is the compound interest effect.
Go for active management
Anyone who opts for active management not only hopes the experts will earn him additional returns, but also exposes himself to less risk of the deadweight of one-time darlings of the equity market cluttering up his portfolio.
After all, passive management maps yesterday’s world.
So investing may be easier than you think. Don’t put it off.
